Powell Set to Testify Before Senate Panel on Interest Rates, Growth Outlook

Federal Reserve Chairman Jerome Powell returns to Capitol Hill on Thursday for a second day of testimony, with investors eager for more on whether his bullish view of the U.S. economy might translate into a more aggressive approach to raising interest rates this year and beyond.

Stocks and bonds sold off Tuesday after he told the House Financial Services Committee the Fed remains on track to gradually lift rates this year and hinted it might pick up the pace as the economy gains momentum.

He is scheduled to begin addressing the Senate Banking Committee at 10 a.m. EST, first delivering the same prepared remarks he presented Tuesday and then taking lawmakers' questions.

Participants in futures markets have indicated they expect the Fed to raise its benchmark short-term rate at least three times this year, in quarter-percentage-point steps, including at its meeting March 20-21, according to CME. These investors also saw the probability of a fourth move in 2018 rise after Mr. Powell's testimony Tuesday, but they haven't priced in many increases beyond this year.

During Mr. Powell's three hours of testimony Tuesday, most of the market reaction centered on an exchange in which he said his "personal outlook for the economy has strengthened since December."

Mr. Powell had been asked what could cause the Fed to raise rates more this year than the three times projected by officials in December. He replied by listing strong job-market gains, firming price pressures, improved global growth prospects, and a boost to economic growth from tax cuts and increased government spending as reasons to believe the economy is picking up steam.

Mr. Powell was simply stating facts about how conditions have changed since Fed officials delivered growth and interest-rate projections in December. But stocks and bonds sold off after the remarks, a sign of how sensitive investors are to clues the Fed might be inclined to raise rates more aggressively.

Mr. Powell said he didn't want to prejudge whether officials would pencil in three or four quarter-point rate rises this year when they meet in March, but in offering his personal view, he provided insight into how he might shape any consensus at that meeting.

His testimony also hinted at how the Fed's focus has shifted. Since the 2007-09 recession, officials resisted calls to raise rates more aggressively in order to support stronger hiring. Mr. Powell said the Fed is now focused on striking "a balance between avoiding an overheated economy and bringing...inflation to 2% on a sustained basis."

The focus on the risk of the economy expanding too quickly is relatively new. It illustrates how the Fed's job could become more difficult now that the unemployment has fallen to 4.1%, a 17-year low, and is likely to fall further due to new fiscal stimulus enacted in recent months.

President Donald Trump signed into law a bill to cut taxes by $1.5 trillion over a decade in December, and in February approved a $300 billion, two-year increase in government spending.